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Funding the State Administration of Unemployment
Compensation (UC) Benefits
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The Unemployment Compensation (UC) programis
constructed as a joint federal-state partnership providing
temporary and partial wage replacement to involuntarily
unemployed workers. Federal law sets broad guidelines
regarding UCbenefits and financing. State laws establish
specific requirements, resulting in 53 different UC
programs operating in the states, the District of Columbia,
Puerto Rico, and the U.S. Virgin Islands. The U.S.
Department of Labor (DOL) provides oversight for state
UC programs. DOL also administers the federalportion of
the UC system, including grants to the states for UC
administration.
For a brief overview of the UCprogram, see CRS In Focus
IF10336, The Fundamentals ofUnemployment
Compensation. For additional details onUC, see CRS
Report RL33362, UnemploymentInsurance: Programs and
Benefits. For information on temporary measures related to
enhanced and expanded unemployment benefits enacted in
the response to the current recession (February 2020-
present), see CRS Report R45478, Unemployment
Insurance: LegislativeIssues in the 116th Congress.
UC A&ns,'dra~ tax sorne
The UC systemis financed through payroll taxes paid by
employers. Stateunemployment taxes (SUTA) may only
fund UC benefits and the state share of the Extended
Benefit (EB) program. Federal unemployment taxes
(FUTA) on employers pay for the administration of the
program(as well as other expenditures, including the
federal share of EB [50% underpermanent law] and loans
to insolvent states).
The net FUTA taxrate on employers in states with UC
programs that are in compliance with all federalrules is
0.6% on the first $7,000 of each worker's earnings per year.
(The FUTA taxrate for employers is 6.0% on the first
$7,000 of each worker's earnings, buta 5.4% credit against
the federal FUTA taxis available to employers in states
with complying UCprograms, bringing the netFUTA tax
down to 0.6%.) DOL projects that $7.0billion in FUTA
taxes will be collected in FY2020.
FUTA revenues are deposited into an account, the
Employment Security Administration Account (ESAA), in
the federal UnemploymentTru st Fund (UTF) and then20%
of the deposits are immediately transferred to the Extended
Unemployment Compensation Account (EUCA), which
funds thefederal share of EB. These funds are made
available through the annual federal appropriations process,
designating ESAA funds to be usedby DOLfor the costs of
administering the state UCprograms.
This atypical arrangement ofstate-fundedbenefits and
federally funded administration has its roots within the
development of the Social Security program. In its 1935
report, the President's Committee on Economic Security
(CES) provided an outline of the UCprogram. It
recommended that federal grants be provided to the states
for the administration of UC benefits. The committee
assertedthatthe federal unemployment taxwould be an
adequate source of funds for federal and state
administration and provide a level playing field for all
states. By structuring the funding for administrationto be
paid from FUTA revenue, the federalgovernmnt could
require proper standards of administration at the state level.
States today mu st comrply with federal taxlaws regarding
the administration of their UC programs or face increased
FUTA taxes.
For a discussion of the interaction of proper state
administration of the UC programand federal
unemployment taxlaw, see CRS Report R44527,
Unemployment Compensation: The Fundamentals ofthe
Federal Unemployment Tax (FUTA).
The full 1935 report from the CES can be accessed at
https://www.ssa-gov/history/reports/ces5.html. (See the
chapter titled Unemplo yment Compensation: Outline of
Federal Act.)
~ ~lor UC
As discussed above, eachfiscalyear, funds are made
available through the appropriations process to make
distributions of FUTA revenue for state UC administration,
and for the federal cos ts of administration. Annual
appropriations to DOL for adminis trative expenses are
bas ed upon DOL's as sessment of state budgetary
requirements, not the size of FUTA collections. These
appropriations customarily include abase level of funding
as well as an additionalcontingent appropriation. The
appropriations language customarily provides a baseline
estimate ofnational unemployment, as measuredby the
volume ofunemploymentconpensation claims expected to
be filed per week (the average weekly insured
unemployment [AWIU]). Additionally, the contingent
funding includes a triggerbasedupon the average volume
of weekly UC claims exceeding the AWIU baseline. For
example, under the President's FY2021 budgetpropo sal,
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Updated July 20,2020](ViewImageLocal?handle=hein.crs/govdayd0001&div=1&collection=&method=preview&ext=.png&size=3)